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The impact of dividend-protected CEO equity incentives on firm value and risk

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  • Karpavičius, Sigitas
  • Yu, Fan

Abstract

Stock options and restricted stock are the two main vehicles of equity-based compensation. In this paper, we analyze how different dividend treatment of stock options and restricted stock grants impacts stock price and the riskiness of the firm. We find that if a firm's manager's utility function includes contemporaneous dividends (as in the case of restricted stock grants), the manager increases the risk level of equity in order to maintain the preferred risk level of her utility function. Increased risk level negatively impacts stock price, ceteris paribus. However, the calibrated model reveals that the impacts are rather trivial, specifically, equity value is lower by 1.5% and leverage is greater by 4%.

Suggested Citation

  • Karpavičius, Sigitas & Yu, Fan, 2018. "The impact of dividend-protected CEO equity incentives on firm value and risk," Economic Modelling, Elsevier, vol. 71(C), pages 16-24.
    • Handle: RePEc:eee:ecmode:v:71:y:2018:i:c:p:16-24
    DOI: 10.1016/j.econmod.2017.11.016
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    References listed on IDEAS

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    2. Duygun, Meryem & Guney, Yilmaz & Moin, Abdul, 2018. "Dividend policy of Indonesian listed firms: The role of families and the state," Economic Modelling, Elsevier, vol. 75(C), pages 336-354.

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    More about this item

    Keywords

    Stock options; Restricted stock grants; Dividends; Firm value;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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